Axios Pro Rata

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September 03, 2022

Welcome back! Hope you're enjoying your extended weekend so far โ€” I know I am ๐Ÿ˜„

  • Today, we're taking a closer look at a couple of merger cases in which the Delaware Chancery Court ordered that the companies go through with the deals. We're also keeping things a bit shorter โ€” and I promise this isn't turning into a newsletter dedicated to Twitter vs. Elon Musk! ๐Ÿ˜ฌ

Today's newsletter is 1,018 words ... 4 minutes.

1 big thing: When a court forces a merger

Illustration of a scale with colored shapes and images of dollars.

Illustration: Gabriella Turrisi/Axios

We're a long way from finding out what will happen to Twitter after it has its day (or week) in court with Elon Musk, which he's still trying to delay. But one potential outcome involves the Tesla CEO being forced to acquire the social media company, even if he doesn't want it anymore.

The big picture: "Specific performance" is a legal concept that's not a historically common outcome in U.S. courts (except in certain areas like land purchases), but the Delaware Chancery Court has gone that route in a number of merger and acquisition (M&A) cases.

Catch up quick: One two-decade-old case, Tyson Foods' acquisition of IBP Inc., has emerged as a popular example of what could happen in Twitter vs. Musk.

  • The two companies struck a deal on Jan. 1, 2001, after Tyson prevailed in an intense auction process against Smithfield to acquire IBP for $30 a share.
  • But within three months, Tyson got cold feet and decided to walk away from the deal, claiming IBP hid issues with its financial statements and poor business performance creating a material adverse effect, and that it deceived Tyson to ink the merger. IBP took it to court in Delaware for breaching their agreement.
  • Then-Vice Chancellor Leo Strine (who now works for one of the main firms representing Twitter against Musk) ruled that "IBP has not suffered a Material Adverse Effect within the meaning of the Agreement that excused Tyson's failure to close the Merger."
  • He also concluded that specific performance is the "decisively preferable remedy."

What they wrote: "This court has not foundโ€ฆ any compelling reason why sellers in mergers and acquisitions should have less of a right to demand specific performance than buyers,โ€ Strine wrote in his explanation of his ruling.

Zoom out: If the tables were turned, Tyson would insist that nothing can replace the strategic gains of acquiring IBP โ€” at the time the largest beef distributor and second-biggest pork distributor โ€” so why should it be different here?

  • Moreover, IBP shareholders were offered the option of taking Tyson stock instead of cash, giving them the opportunity to share in the upside of the combined business, another irreplaceable aspect of the deal.
  • Awarding damages would not only be complicated but "will lack any pretense to precision" given the likely disagreement over valuation, he noted.
  • "Finally, there is no doubt that a remedy of specific performance is practicable," Strine writes. "Tyson itself admits that the combination still makes strategic senseโ€ฆ Tyson Foods is still interested in purchasing IBP, but wants to get its original purchase price back and then buy IBP off the day-old goods table."

Between the lines: Delaware's Chancery Court appears to err on the side of whatever parties agree to in their contracts, UC Davis law professor John Patrick Hunt tells Axios.

  • And that extends to specific performance, if a contract does stipulate that it's an available remedy subject to certain conditions (as does Twitter's contract with Musk).

Yes, but: In his decision, Strine noted that the implications of forcing the merger on the companies' employees and communities weighed heavily on his mind. It suggests the Chancery Court may be sympathetic to the potential disaster of a forced merger.

  • Still, Hunt tells Axios that forcing Musk to acquire Twitter is just a purchase of corporate shares. Nothing would oblige him to manage the company himself. He could just passively own it, or even immediately sell it.

The intrigue: That's not how all Delaware Chancery Court cases where specific performance was ordered have turned out. More on that belowโ€ฆ

2. When they settle instead...

Illustration of a magnifying glass examining a hundred dollar bill

Illustration: Sarah Grillo/Axios

In another well-known deal dispute, the Delaware Chancery Court ordered parties Huntsman and Apollo Global to complete their merger.

Why it matters: Unlike Tyson and IBP, the two sides here actually went on to settle for a payout following the trial, instead of combining the two businesses.

Backstory: In 2007, Apollo-backed Hexion Specialty Chemicals agreed to acquire rival Huntsman for $6.5 billion.

  • However, by mid-2008, Apollo asked a Delaware court to cancel the agreement, arguing "that a combined Hexion-Huntsman โ€” a classic boom-era deal funded 100% with debt โ€” would be insolvent and therefore couldn't meet banks' funding conditions," per the WSJ.
  • A six-day trial ended in a victory for Huntsman, and the court told Apollo to do its best to close out the transaction.
  • Ultimately, founder Jon Huntsman and then-Apollo boss Leon Black hammered out an alternative deal: Huntsman would receive $1 billion from a combination of sources (much more than the contract's $325 million breakup fee, but less than the original buyout amount).
  • The weakening chemicals market and economic conditions drove Huntsman's decision to settle and move on, according to the WSJ.

Between the lines: "In general, lawyers talk all the time about seeking specific performance with the intention of getting bought out," UC Davis' Hunt explains.

So while it's impossible to know Twitter's strategy and intentions beyond what it says in its court filings, it could very well be open to a financial settlement with Elon Musk.

  • A court victory could give it leverage to negotiate more than the $1 billion breakup fee in the contract.

3. What's next

Illustration of a calendar surrounded by geometric shapes

Illustration: Annelise Capossela/Axios

Mark your calendars: A new hearing has been scheduled for Sept. 6 at 1:30 p.m. E.T., during which the parties will discuss several motions, including Musk's request to delay the trial.

  • Briefs are due on Sunday afternoon.

๐ŸŒถ๏ธ Meanwhile: The court yesterday denied investor (and Musk pal) David Sacks' motion to quash his subpoena (read the full, spicy ruling).

๐Ÿ“š Due Diligence

๐Ÿงฉ Trivia

Twitter's initial request to the court was to have the trial in late September.

  • Question: Why is that timing important with regard to the outcome it seeks? (Answer at the bottom.)

๐Ÿงฎ Final Numbers

Data: Yahoo Finance; Chart: Kavya Beheraj/Axios

๐Ÿ™ Thanks for reading! See you on Tuesday for Pro Rata's weekday programming, and please ask your friends, colleagues and legal scholars to sign up.

Trivia answer: One of the requirements for specific performance is that Twitter's shareholders approve the merger โ€” and that vote is scheduled for Sept. 13.